Treasury prices rise on nuclear worries

Good demand for 3-year auction boosts bonds

By

DeborahLevine

NEW YORK (MarketWatch) — Treasury prices extended gains Tuesday, pushing 10-year yields down by the most in almost a month, after the government sold its first major debt auction of the week at a lower-than-expected yield.

Bonds had risen throughout the session as Japan’s assessment of its damaged Fukushima Daiichi nuclear plant worsened, increasing demand for the relative safety of U.S. debt.

Yields on 10-year notes
TMUBMUSD10Y, +0.72%
which move inversely to prices, fell 9 basis points to 3.50%. At one point, they dropped the most since March 16. A basis point is 1/100th of a percent.

Yields on 2-year notes
TMUBMUSD02Y, +0.60%
slid 8 basis points to 0.75%, declining the most since March 4.

Indirect bidders, a group of investors that includes foreign central banks, bought 33.7%, versus an average of 34.5% in recent sales.

Analysts regard the statistics, as imperfect as they are, as a snapshot of foreign investors’ appetite for U.S. debt. Final figures on what types of investors were buying at the auction take longer to be released.

Direct bidders, a group that includes domestic money managers, purchased another 8.9%, compared with 14.2% on average.

A higher proportion of a sale going to direct and indirect bidders is considered a sign of strong investor demand. Otherwise, primary dealers end up with more of the new debt, and they tend to turn around and sell it, weighing on prices of other securities.

The government will auction 10-year notes on Wednesday, followed the next day by a sale of 30-year bonds. Both sales are reopenings, meaning the debt sold will carry the same coupon and mature on the same date as the originally issued debt — in this case, in February.

Flight-to-safety trade

Bonds gained ground starting in Asian trading hours after Japanese nuclear-safety authorities raised their assessment of the Fukushima Daiichi crisis to the same level as the 1986 Chernobyl disaster in the former Soviet Union. Read more on Japanese nuclear crisis.

But officials emphasized the amount of radiation leaking from the Fukushima plant, stemming from damage caused by last month’s massive earthquake and tsunami, so far was only about 10% of that released in the deadly Chernobyl accident.

“The global investment community is taking the latest developments as good reason to re-initiate the flight-to-quality trade by fleeing riskier assets in favor of Treasurys,” said Kevin Giddis, president of fixed-income capital markets at Morgan Keegan.

Bond traders also continued to assess comments from various Federal Reserve officials. Several policy makers have spoken out in recent weeks about their discomfort with the U.S. central bank’s current easy monetary stance and bond-purchase program.

In recent days, Federal Reserve Vice Chair Janet Yellen and New York Fed President William Dudley cautioned against central bankers overreacting to a rise in headline inflation, saying commodity-price surges are likely to be transient and not cause broader U.S. inflation. Read more on Yellen.

Yellen “highlighted that the Fed’s outlook in the weeks ahead is likely to be more balanced than the hawks were painting only a few weeks ago,” said analysts at Nomura Securities, led by George Goncalves.

“Yellen sought to rebut some of the criticism of the Fed in recent times by once again highlighting the conclusion that the Fed was not to blame for commodity-price spikes, and that until wage inflation caught up with commodity prices, that flow through would likely be limited,” they wrote in a note.

The centerpiece of the Fed’s policy has been the buybacks of U.S. Treasurys, in an attempt to keep money flowing through the financial system and to prevent too much of an increase in interest rates, which could slow the economy’s recovery.

Besides a $600 billion program announced in December, the Fed has since August been reinvesting cash from maturing mortgage-related holdings back into Treasurys.

Under both programs, the Fed has purchased $588 billion in notes and bonds so far, according to Morgan Stanley.

The Fed said Tuesday that it would buy $97 billion in the next month. Strategists at Morgan Stanley expected the Fed to plan on buying $105 billion in order to finish its $600 billion program as stated in June. See New York Fed’s website.

Also Tuesday, Treasury prices held the line on gains after data showed the U.S. trade deficit narrowed in February.

The gap was still wider than predicted and “points to a trade drag on first-quarter growth,” said economists at RDQ Economics. That prompted many analysts to mark down their estimates for first-quarter growth, which would tend to increase interest in Treasury debt instead of assets deemed riskier. See more on trade deficit.

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